PRACTIQUE LEGAL – Are Non-Compete Agreements Valid in Mexico?

by: Rene CacheauxThis question does not have an easy answer. In reality, the validity of agreements that include a provision restricting competition in its various forms depends on a specific analysis of each case. Unlike other countries, Mexico does not have clear guidelines in this area. There are, however, legal principles that do regulate the personal and commercial activity of individuals and entities. Non-compete agreements have varying levels and scope of application. Such non-compete agreements exist both at the individual level and between businesses or corporations. Furthermore, competition restrictions exist based on territory or time periods. These agreements are of a very diverse nature and each one requires a detailed analysis. A non-compete agreement with identical language can be analyzed from a different angle simply by reason of its term/time period. A non-compete agreement with a one year term is not the same as an identical agreement that runs for twenty years. In Mexico, restrictive rules exist at all hierarchical levels of legislature, from the highest level in Mexico's Federal Constitution, through ordinary federal and state statutes. Federal laws are very clear in the sense that all individuals have the right to freely exercise a profession, carry out a job or dedicate themselves to the business or industry of their choice. This right may not be restricted without just cause and through a judicial resolution. This individual right represents a severe impediment to the enforceability of non-compete agreements signed by individuals. For example, a non-compete agreement to be signed by an executive of a company, which prevents such individual from working for competing businesses, would be considered as an illegal contract. The same would occur if the same employee were to be restricted from working in the same profession, job, business or industry within a territorial radius of a fixed place defined by the parties. In the case of agreements signed by individuals, it is very difficult to find a formula to support the validity of a non-compete agreement if the agreement implies restrictions on an individual person. With respect to businesses and corporations, the situation is different, although challenges still exist regarding the validity of these types of contractual provisions. Mexican federal laws establish that agreements and contracts that limit or restrict the distribution, sales, processing and fabrication of products and services may be considered as impermissible monopolistic practices. The Mexican Federal Economic Competition Commission exists in order to determine which processes are monopolistic or which restrict free competition. Such Commission has issued various guidelines in relation to this topic, even if all of these are not completely clear and precise. For example, non-compete agreements entered into by competitors within the same industry or business in order to restrict production or provide services are, in the majority of cases, considered as impermissible monopolistic practices. Additionally, corporate non-compete agreements for a term of greater than five years could fall into the same classification of monopolistic practices. Given that it is impossible to establish clear and specific criteria regarding the validity of these types of agreements, it is worth mentioning that each case should be analyzed according to its own merits and small variations in language could be the elements that determine the validity or invalidity of these agreements. Because of the restricted validity of such agreements, it is recommended that their terms and conditions be reviewed by a qualified attorney before formulating and inserting them into an agreement.

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